Cash. Just the sound of it evokes permanence, substance, an almost tangible feel, a tribute to its origin in the French word for ‘money box,’ casse. We speak of “cash in hand,” “cash on the barrelhead” and “cash cow,” all suggesting an unqualified immediacy of value or profit. Cash is the lubricant of finance, the most liquid of assets; if there is anything for which one would say “don't leave home without it,” it must be cash. The range of uses of cash is unlimited. But the primary question is this: where do you get cash?
There are basically three ways to obtain cash: 1) working; 2) selling assets; and 3) investing assets. One way of obtaining cash is by selling existing assets from an existing asset portfolio. As shown in FIG. 1, one can sell certain assets from an asset portfolio 100 including assets A, B, C, and D, to obtain a modified asset portfolio 103 including assets A′, B′, C′, and D′ and a certain amount of cash. One can use such cash generated to purchase other assets, so as to obtain another modified asset portfolio 105 including assets A″, B″, C″, D″, E″, and F″. These assets A, B, C, D and the like can be any type of assets, such as stock of a particular company, stock of a particular type (large cap, small cap, etc.), real property, bonds, intellectual property, personal property, cash, and even debt or liabilities. For the purposes of the present invention, an ‘asset’ is anything that can be given an economic value. Conventional investment strategies normally only recommend how an asset portfolio should be redistributed for optimization. This is so called portfolio optimization or portfolio balancing. As shown in FIG. 2, conventional investment strategies typically recommend that, for a given investor, the initial asset portfolio 100 including a plurality of assets, such as A, B, C, and D, should be redistributed to the modified asset portfolio 105 including a plurality of assets, such as A″, B″, C″, D″, E″, and F″. In order for such portfolio optimization to occur, it is inevitable that certain assets in the initial asset portfolio should be sold to generate a certain amount of cash and that the generated cash should be used to purchase new assets for the modified asset portfolio, as shown in FIG. 1. However, the prior art (FIG. 2) only teaches the type and amount of assets that should be included in the modified asset portfolio, but does not teach or suggest how a certain amount of cash should be generated from the initial asset portfolio while satisfying certain objectives in order to reach the modified asset portfolio. In other words, conventional portfolio optimization merely identifies the desired end result, the modified portfolio, but does not describe how to achieve that end result.
One of the key issues that arise in disposing of assets in any context is the tax consequence. While many investment strategies suggest minimizing tax consequences, when it comes to determining which assets to dispose of in which amounts, the complexity of determining the tax effects is typically overwhelming. While investment advisors do have general heuristics or suggestions for considering the tax consequences, these are merely precautionary, and not based on computational analysis of the actual tax consequences of each various possible optimization plans.
It is a very complicated task to find a solution for how an initial asset portfolio should be modified to generate a certain amount of cash while satisfying certain objectives as shown in FIG. 1. Consider, for example, a situation where $4,000 of cash should be generated from an asset portfolio having ten different mutual find holdings each comprising 10 lots that have assets in different capital gain categories under the tax law, while satisfying certain objectives specified by a user. The search space for this situation would involve devising a plan to sell some part of each asset so as to generate a certain amount of cash while satisfying certain objectives. Having ten funds each with ten lots, there will be 100 distinct assets of which some fraction can be sold. Assuming that the assets can be sold between 1% and 100% in 1% increments, just to simplify the calculation, there will be 100 ways to sell each asset. That is, there will be 100 ways to sell 100 distinct assets, resulting in 100100 combinations of possible solutions. In addition, a variety of objectives should be considered when finding the solution, such as minimizing tax obligations, maximizing capital gains, avoiding sale of certain assets, minimizing associated commissions and fees, minimizing the number of transactions, preference to sell entire asset lots, consideration of future value, consideration of personal preference, etc., with respect to a user-specified importance level for each objective. The solution space for such a situation will be enormous, discontinuous in scope and will typically involve non-linear, non-dimensional, and inter-dependent variables.
Such a complicated problem is very difficult to solve, but once a solution is obtained, it is easy to check the solution. Such problems are called non-deterministic polynomial (“NP”) problems, which mean that it is possible to guess the solution by some non-deterministic algorithm and then check the solution, both in polynomial time. NP problems typically can be solved by genetic algorithms. However, so far there has been no attempt to apply a genetic algorithm to finding a solution for generating a certain amount of cash from an asset portfolio while optimizing certain objectives of a user.